Cleveland’s commercial real estate investment market enjoyed a sustained period of strong activity during the mid-2000s. Fueled by plentiful debt, a seemingly endless supply of buyers and no shortage of willing sellers, the overall sales volume grew to unprecedented levels, topping $1 billion for three consecutive years.
While most industry professionals knew this level of activity, as well as the associated upward spiral in pricing, couldn’t last, few had any idea how swift and severe the market would turn.
Three hallmark transactions help illustrate the height of the market in 2006-2007 and how far this market has since fallen. The story of each of these sales is profiled below.
Duke’s Eastern Suburban Office Portfolio
Duke Realty entered the Cleveland marketplace in the mid-1990s by acquiring an existing office portfolio. Over the next decade, the REIT quickly grew to be one of the largest office and industrial owners in the region.
However, in 2006, Duke shocked the local market by announcing its intent to sell all of its local holdings and withdraw from the market. Duke sold off most of its holdings in smaller groups of properties and to a variety of buyers.
One of the larger of these groups was an eight-property package of suburban office buildings located in Cleveland’s eastern suburbs. This package encompassed 895,000 square feet and sold for $140 million in early 2007.
The pricing level of $156 per square foot set a local high-water mark for suburban multi-tenant office properties. The buyer was a local owner/investor that partnered with a private investment group from New York.
Over the next four years, the economic downturn resulted in increasing vacancy and softening rents, which has adversely affected the performance of the portfolio. This past July, the portfolio, which carries a $135 million CMBS loan, was transferred to a special servicer.
The borrower has publicly stated that it has no intention of relinquishing the properties. Instead, the borrower is interested in discussing alternative loan structures with the lender. However, the borrower has not made a loan payment since April of this year.
City View
This 700,000-square-foot power center opened with great fanfare in 2005. Developed on a well-located but challenging site, the center was anchored by a Walmart Supercenter, Giant Eagle, Dicks Sporting Goods, Circuit City, Office Max and Bed, Bath & Beyond, among others.
A private investor from New York acquired the property in December 2006 for $100 million at a reported capitalization rate of 6.5 percent. In 2008, Walmart abruptly vacated the premises, citing environmental and structural concerns. Much of the site was built on a former landfill.
Losing the primary anchor tenant led to a dramatic downward spiral, which was fueled by the economic downturn, tenant bankruptcies and the environmental challenges. The borrower made its last payment on the $80 million CMBS loan in late 2008, and the property was transferred to a special servicer in early 2009.
Today, the servicer is still in place. Only Giant Eagle and OfficeMax remain, and a recent appraisal of the property estimates the value to be $4.5 million.
800 Superior
This 464,000-square-foot office tower in the central business district was built in 1969 and includes a 328-car parking garage. Its longtime Cleveland-based owner sold the property in 2002 for $45.5 million to a Canadian REIT.
The new owner held the property for several years, and then subsequently resold it as part of a 34-property portfolio in December 2007.
A Texas-based private investment group acquired 800 Superior for $67.8 million, or $146 per square foot.At the time of sale, the building was close to full occupancy, led by three primary tenants — KeyBank, UBS and Calfee Halter & Griswald, a local law firm. However, all three tenants had their respective leases expire over the next four years, and all either downsized or vacated.
The building was taken over by a special servicer in late 2009 and put up for auction in July 2011. The successful purchaser, AmTrust Realty, paid $7.5 million, or $16 per square foot for the property and intends to occupy at least a portion of it for its own use.
While each distressed property has its own individual story, the ending is almost always the same — a sale price that reflects a fraction of the property’s value from just a few years earlier.
Although many of the distressed properties locally have been resolved, there are still a significant number on the horizon. The Cleveland market enjoyed several booming years, and it will likely take just as long to sort itself out.
— Alec Pacella is a senior vice president specializing in investments with NAI Daus Commercial Real Estate Services in Cleveland.